legal guide09.indd - Islamic Finance News

The Development of Islamic Banking and Finance (continued..)
used extensively in Malaysia, are not regarded as
valid Shariah contracts in many jurisdictions.
Court systems
Malaysia practices a dual court system: the civil
courts and the Shariah courts. The civil courts are
founded on the common law courts system that is
well established in the UK and the Commonwealth
countries; this is the mainstream court system in
Malaysia.
The Shariah courts, however, have limited jurisdiction
and are mainly confined to Islamic personal law
matters affecting Muslims. They have no jurisdiction
to take cognisance of other matters, even if they
involve Islamic law, for example Islamic banking and
finance. Thus Malaysia has the unique system where
Islamic banking and finance disputes are litigated in
the civil courts.
Law applicable to Islamic banking and finance
Another peculiar but interesting feature of the Islamic
banking and finance practice is the law applicable
to it. The civil laws of the country, passed by
the Federal Parliament, are laws of general application.
For instance, the Contracts Act 1950 applies to
all contracts, Islamic or otherwise, so these civil laws
also apply to Islamic banking transactions.
The civil courts have long recognized Islamic law as
part of the law of the land and this means Islamic
law will apply to such transactions, in addition to the
civil laws.
In such circumstances, there can arise situations
where there is a conflict between these two laws in
a given contract. Indeed, such situations have arisen
and the courts have had to deal with them on a caseby-case
basis.
As of now, there is no provision in the law which
specifically states that if there is such a conflict,
Islamic law will prevail. Legislative intervention is
therefore necessary to introduce a law to that effect
and to make other amendments to existing laws to
expressly provide for the application of Islamic law
to those transactions.
“Malaysia has the unique
system where Islamic banking
and fi nance disputes are
litigated in the civil courts”
Islamic banking and conventional banks
Only a bank licensed under the Act could carry out
Islamic banking business. So, in an effort to get
conventional banks involved in Islamic banking,
Parliament amended the Banking and Financial
Institutions Act 1989 (BAFIA), which governs
conventional banks, in 1996 to allow them to conduct
Islamic banking business.
A notable feature in the new section introduced
is the definition of the Islamic banking business: it
adopts the definition in the Act. This means that
the scope of the Islamic banking business that can
be carried out by a conventional bank is exactly the
same as that for an Islamic bank.
The practical outcome of this is to turn conventional
banks into two-in-one banks, that is, they are
conventional banks as well as Islamic banks, in all
but name. This novel experiment resulted in almost
all conventional banks having “Islamic windows”
through which they offered a full suite of Islamic
banking products.
Over time, conventional banks found Islamic banking
to be profitable and embraced it enthusiastically.
They were then encouraged by the authorities to
establish Islamic banking subsidiaries licensed under
the Act, which would take over and further expand
their Islamic banking operations and function as
independent legal entities.
Today there are 12 such full-fledged Islamic banks
(subsidiaries of conventional banks) operating in Macontinued....
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